Banks do funny things when a customer files bankruptcy.
Only many are not so funny.
Whether your relationship with your bank has been good or not, there may be grounds for divorce before you file your bankruptcy case.
Or at least consider whether there are grounds for a separation.
Set off
Your bank owes you the money you’ve deposited with them. Heady to think of Bank of California as being in your debt, eh?
If you owe them money on a personal loan or a car loan, you are their debtor.
The bank has the right under common law to take what it owes you to pay what you owe them.
That’s called set off, or sometimes, off set.
Further, that right to take the money in your account to pay your debt to the bank makes the bank a secured creditor when you file bankruptcy. Secured creditors have rights in their collateral that survive the bankruptcy case.
While your bank is free to set off at any time, a bankruptcy notice is likely to trigger set off. All of a sudden, “your” money in the bank is now the bank’s money.
Not good.
Action item: either close the account or take the balance down to an amount you can live without on the day you file bankruptcy. Money you earn after bankruptcy is safe as a matter of law from off set against a debt you owed from before bankruptcy.
Frozen
Several banks, most notably Wells Fargo, freeze bank accounts with significant balances on getting a bankruptcy notice.
No matter that the money is claimed exempt. No matter that it’s necessary to pay bills. It gets frozen.
The bank claims to be “helping” the Chapter 7 trustee. Even before the trustee asks for help.
The account can be unfrozen, with instructions from the trustee. But that’s not always available quickly or easily.
Avoid the chill: divorce Wells Fargo and like-minded banks, or reduce the amount on deposit.
Shut out
The third trick in the bank’s arsenal is to block access to electronic records online and to cut off electronic banking access.
This is inconvenient, but not harmful in the long term.
The banks seem to be quick to cut off your access to your information, but just try to get them to permanently stop a previously authorized debit to your account. Sometimes closing the account is the only thing that will stop the automatic debt, and I’ve seen attempts to stop ACH’s result in overdraft charges, as the bank paid it anyway.
Credit unions are notorious for terminating the membership of anyone who files bankruptcy and discharges a debt to the credit union.
Revisit paper: have hard copies of account numbers, payment addresses and monthly payments before your case is file.
Make new friends
Consider opening new accounts or, at minimum, reducing your balances at your present institution before your bankruptcy case is filed. Your economic life during bankruptcy will be easier.
Divorce is difficult, but you can forge new (banking) relationships.
Image: Chris Griffith and Flickr
Helpful post, and great blog with quality resources for bankruptcy filers/potential filers. Thanks for going through the options here on either maintaining or severing bank relationships.
Is this only an issue where a debtor seeks to discharge a claim owed by a bank?
Or can this happen even where a debtor fails to list a bank on his mailing matrix (and does not seek discharge from the bank)?
The freeze issue is unrelated to debts to the bank. Set off and disabling electronic banking are usually tied to mortgage debts to the bank that will survive the bankruptcy filing.